Why Profits and Losses Are Both Critical to the Economy

377 Words2 Pages
The profitability of companies is recurrent by nature. We expect to see fluctuations in profit according to what’s high in demand in the economy and the level of demand in particular industries. If the market price of a good is more than the opportunity cost of producing it, producers will increase supply in the long run. Profits and losses ensure that, in a market economy, resources are distributed to their highest-valued uses by rewarding those who create wealth and by punishing those who destroy it. So just as profits reward producers for making things people want to buy at prices they are willing to pay, losses punish producers for wasting resources and producing things people don’t want at a cost consumers are not willing to cover. Negative profits and business failures serve a productive function in the process of business growth and development. When one business enterprise in a market economy finds a way to lower its costs, competing enterprises have no choice but to scramble to try and do the same. Any change in the economy, such as an increase in demand for a product, requires further changes and adjustments in many aspects. Any kind of change in the output of one product will most likely require changes in other markets, as well, and will start a chain of adjustments. Lower costs can benefit not only its own customers of an enterprise, but those of other competing enterprises as well. Someone or something must decide what is to be produced, how, by whom, and what is to be consumed by whom. This pursuit of profit will encourage firms to produce more efficiently and keep their costs low, encourage firms to produce goods and services that consumers value highly relative to costs, and also discover and develop better products and lower-cost production methods. In turn, the economy can operate more efficiently. Higher profit leads to higher dividends and
Open Document